Daily Price RecordBoeing Co (The) [BA] 09702310 ActiveFrom 1/1/2012 to 12/31/2014As of 01/19/15 10:05 AMDateDividend IndicatorVolumeHigh PriceLow PriceClose PriceAdjusted Close PriceQ1 Avg Adj Close Price1/2/0865784657574.1274.2274.2274.901/3/08492286374.673.5974.3374.331/4/08678788873.972.7473.5373.531/5/08476023774.2772.9573.9873.981/8/08446918374.8774.1874.5374.531/9/08462224875.3474.575751/10/08308236074.9574.2374.7474.741/11/08393279575.6974.7875.5175.511/12/08464091275.274.1674.674.61/16/0836994197675.1475.2475.241/17/08418691175.4574.7775.0675.061/18/08539656575.9275.175.5675.561/19/08455206975.975.1475.5275.521/22/08408322376.3775.3275.5175.511/23/08493428675.6274.675.3675.361/24/081404907076.772.8575.8275.821/25/08418730976.367575.3175.311/26/08475450475.2374.4174.5574.551/29/08504292274.3573.6874.1674.161/30/08477725175.273.9674.1874.181/31/08429610175.8974.9675.3775.372/1/08352807275.3374.575.2275.222/2/08347206276.7475.8676.3476.342/5/08416078775.5575.1675.4675.462/6/08443852175.3574.375.275.22/7/08X534993775.6574.5175.4675.462/8/08449087376.2375.3775.975.92/9/08336187375.5674.5774.9574.952/12/08345409375.5174.7574.8574.852/13/08465194975.5774.975.5675.562/14/084251971767575.2175.212/15/08499123075.4774.8775.2775.272/16/08492723275.5575.0275.3575.352/20/08397808675.9575.0875.7275.722/21/08376474776.375.3176.0676.062/22/08418651276.1775.5275.8575.852/23/08334665976.6475.6376.0676.062/26/08537028475.7875.0175.2175.212/27/08366726075.4174.8175.1675.162/28/08463271875.7274.7574.9574.952/29/08334274175.6374.8675.0875.083/1/08280640975.2874.6374.974.93/4/08415667874.9873.9374.1374.133/5/08542598773.2472.372.5672.563/6/08427894273.772.5173.5273.523/7/08388117674.773.8374.1774.173/8/08553486774.3173.1773.2973.293/11/08283346874.0373.273.673.63/12/08452898974.3573.3874.3174.313/13/08529687675.3874.3175.2375.233/14/08485064675.6374.8875.4375.433/15/08707983275.817575.275.23/18/08268369675.697575.475.43/19/08438395075.4774.5275.1475.143/20/08364403975.4474.875.0175.013/21/08492138074.6673.3773.9273.923/22/08251831474.3473.7573.9773.973/25/08371516075.2374.4775.1875.183/26/08351068475.2574.874.8174.813/27/08341214775.2973.974.3374.333/28/08358751174.1572.9574.0874.083/29/08320411074.4473.7874.3774.37Q2 Avg Adj Close Price4/1/08410448075.4773.6175.1775.1772.584/2/08348590075.1174.1574.6574.654/3/08249042074.1973.4973.6773.674/4/08264017673.8973.373.5973.594/8/08244336172.7972.2772.4372.434/9/08533888772.3170.5970.670.64/10/08509982172.5171.4971.7771.774/11/08393875973.8371.6973.573.54/12/08332906573.3872.3772.9272.924/15/08479998873.1972.372.6872.684/16/08332051974.3673.174.0974.094/17/08224887874.2473.4773.7173.714/18/08372936873.9672.6673.173.14/19/08430201974.0373.173.5573.554/22/08502208373.1372.1772.8672.864/23/08366331073.7472.7773.2173.214/24/081062129077.574.977.0877.084/25/08470474477.276.5576.9976.994/26/08375654477.5776.977.2777.274/29/08581105976.8775.6876.876.84/30/08428765577.8375.8577.2577.255/1/08307345977.576.3477.2677.26.
15. Borrowing1.58B1.56BColombiaCBLT
Borrowing7.3B8.07BDenmarkDCShareholders
Equity14.51B14.88BFinlandFHCash8.18B7.51BFranceFPGerma
nyGROperating Income4586GreeceGAInterest Expense386Hong
KongHKIncome tax expense1646IndiaINIncome before XO
items4.59BIrelandIDNet
Income4585ItalyIMJapanJPDepreciation &
Amortization1.84BKoreaKSCapital Expenditures-2.24(Absolute
value on financials page)MexicoMMChange in non-cash
WC1.08B(Financials
page)NetherlandsNADividends1467(Absolute value: See
descriptions)NorwayNOChange in ST Borrowing(See
description)RussiaRUIncrease in LT Borrowing863(See
description)SingaporeSPDecrease in LT Borrowing(Absolute
value: See descriptions)SloveniaSVSouth AfricaSJRaw
Beta1.194(Regression beta page)SpainSMStandard error of
Beta0.096(Regression beta page)Sri LankaSLR
Squared60.40%(Regression beta page)SwedenSSAlpha
(Intercept)0.09%(Regression beta
page)SwitzerlandVXTaiwanTTDefault Inputs (You can change
these, but only if you want to…)TurkeyTIType of firm1(1:
Market cap>$5 billion, 2: Small cap firm)UKLNAverage
riskfree rate (last 2 years)4%United StatesUSAverage maturity
of debt =3VietnamVNDo you have operating
leases?YesVenezuelaVSIf you want to override the operating
lease input and enter yes, you also have to enter the
followingCurrent year's lease expenseLease commitment: Year
1Lease commitment: Year 2Lease commitment: Year 3Lease
commitment: Year 4Lease commitment: Year 5Lease
commitment: Beyond
1. Regression analysisYour inputsINPUTSAre you using weekly
or monthly returns?W(M or W)Current Riskfree Rate1.76%!
Today's ten -year government bond rate (make sure that you
pick the right currency)Risk Premium5.80%! You can use either
the historical premium or the implied premium or an augmented
premium for country risk.Beta1.194! Raw betaStd Error of
16. Beta0.096! From a regression of returns to S&P500 returns. Use
Finance.Yahoo.com to get your company's price (adjusted close)
& the S&P500 (^GSPC)Intercept0.09%! Remember that this is
already in % on your regresson output out; in other words, 0.05
is .05%.Past Riskfree rate (Annual)1.50%! Average short term
riskfree rate over period of regression; This is the US $ average.
See past riskfree rates worksheet for rates in other
currenciesThis is what your output shoud look likeOUTPUTSRf
(1- Beta)-0.01%Jensen's Alpha by period0.093%(Monthly or
Weekly)Jensen's Alpha Annualized4.93%(Annual)67%
range1.291.1095% range1.391.00Expected Return8.69%
2. Bottom up Beta for CompanyInputsINPUTS on YELLOW
cellsIndustryAerospaceIf you are a multi-business company,
you can input the followingUnlevered beta (adjusted for
cash)1.44BusinessRevenuesEV/SalesEstimated
ValueWeightUnlevered BetaEntertainment$ 100.002.3400$
234.0088.80%1.3100Do you want to replace this beta with a
weighted average?YesElectronics$ 50.000.5900$
29.5011.20%1.1700If yes, please compute the weighted average
(you can use adjoining table)0.0000$ - 00.00%0.00000.0000$
- 00.00%0.0000Book value of Debt$00.0000$ -
00.00%0.0000Interest expense$3860.0000$ -
00.00%0.0000Average maturity of debt30.0000$ -
00.00%0.0000Market value of Debt$00.0000$ -
00.00%0.0000Market value of Equity754360.0000$ -
00.00%0.0000Market D/E ratio0.00%0.0000$ -
00.00%0.0000Marginal tax rate40.00%0.0000$ -
00.00%0.0000Bottom up unlevered Beta =1.290.0000$ -
00.00%0.0000Bottom up levered beta0.00Company$ 150.00$
263.501.2943
3. Synthetic RatingInputs for synthetic rating estimationPlease
read the special cases worksheet (see below) before you use this
spreadsheet.Before you use this spreadsheet, make sure that the
iteration box (under calculation options in excel) is
checked.Enter the type of firm =1(Enter 1 if large
manufacturing firm, 2 if smaller or riskier firm, 3 if financial
17. service firm)Small: <$5 billionDo you have any operating lease
or rental commitments?YesEnter current Earnings before
interest and taxes (EBIT) =4586(Add back only long term
interest expense for financial firms)Enter current interest
expenses =386(Use only long term interest expense for financial
firms)Enter current long term government bond rate
=1.76%OutputInterest coverage ratio =11.88Estimated Bond
Rating =AAANote: If you get REF! All over the place, set the
operating lease commitment question in cell F5Estimated
Default Spread for company =0.40%to No, and then reset it to
Yes. It should work.Estimated Default Spread for country
=0.00%Estimated Cost of Debt =2.16%If you want to update the
spreads listed below, please visit
http://www.bondsonline.comFor large manufacturing firmsFor
financial service firms (default spreads are slighty different)If
interest coverage ratio isIf long term interest coverage ratio
is>≤ toRating isSpread isgreater than≤ toRating isSpread is-
1000000.199999D12.00%-
1000000.049999D12.00%0.20.649999C10.50%0.050.099999C10
.50%0.650.799999CC9.50%0.10.199999CC9.50%0.81.249999C
CC8.75%0.20.299999CCC8.75%1.251.499999B-
7.25%0.30.399999B-
7.25%1.51.749999B6.50%0.40.499999B6.50%1.751.999999B+5
.50%0.50.599999B+5.50%22.2499999BB4.00%0.60.749999BB4
.00%2.252.49999BB+3.00%0.750.899999BB+3.00%2.52.99999
9BBB2.00%0.91.199999BBB2.00%34.249999A-
1.30%1.21.49999A-
1.30%4.255.499999A1.00%1.51.99999A1.00%5.56.499999A+0.
85%22.49999A+0.85%6.58.499999AA0.70%2.52.99999AA0.70
%8.50100000AAA0.40%3100000AAA0.40%For smaller and
riskier firmsIf interest coverage ratio isgreater than≤ toRating
isSpread is-
1000000.499999D12.00%0.50.799999C10.50%0.81.249999CC9.
50%1.251.499999CCC8.75%1.51.999999B-
7.25%22.499999B6.50%2.52.999999B+5.50%33.499999BB4.00
%3.53.9999999BB+3.00%44.499999BBB2.00%4.55.999999A-
18. 1.30%67.499999A1.00%7.59.499999A+0.85%9.512.499999AA0
.70%12.5100000AAA0.40%
Aswath Damodaran:
If yes, fill in the attached worksheet on operating leases
Aswath Damodaran:
If your most recent year's operating income is unusually low or
high, you can use the average operating income from the last
few years.
Aswath Damodaran:
Enter the interest expense from the most recent income
statement.
Aswath Damodaran:
I use a 10 year government bond rate.
4. Cost of capitalCost of capitalINPUTS in YELLOW cellsIf
you are a multinational company and have a breakdown by
country, you can use this table (for up to 10 countries)Equity
componentCountryRevenuesERPWeightWeighted ERPMarket
value of equity75436Argentina1914.80%82.61%12.23%Levered
Beta0.00Bulgaria48.43%17.39%1.47%Riskfree
Rate1.76%00.00%0.00%0.00%Equity Risk
Premium5.80%00.00%0.00%0.00%Cost of
equity0.00%00.00%0.00%0.00%00.00%0.00%0.00%Debt
component00.00%0.00%0.00%Market value of
debt000.00%0.00%0.00%Pre-tax cost of
debt2.16%0.00%0.00%0.00%Marginal tax
rate40.00%0.00%0.00%0.00%After-tax cost of
debt1.30%Total23100.00%13.69%If you are a multinational
company and have a breakdown only by region, you can use this
table insteadMarket Debt to capital
ratio0.00%RegionRevenuesERPWeightWeighted ERPCost of
capital0.00%Africa010.09%0.00%0.0000%Australia & New
Zealand05.80%0.00%0.0000%Caribbean12.57%0.00%0.0000%C
entral and South America109.18%10.00%0.9180%Eastern
Europe & Russia8.48%0.00%0.0000%Middle
East6.96%0.00%0.0000%North
America305.80%30.00%1.7400%Western
19. Europe356.85%35.00%2.3975%Asia without
Japan157.58%15.00%1.1370%Japan106.85%10.00%0.6850%Tot
al100100.00%6.8775%
5. ROIC & EVAReturn on capital & equity
computationOperating income4586Invested capital end of last
year=0Pre-tax Return on invested capital =0.00%After-tax
Return on invested capital (marginal tax rate) =0.00%Effective
tax rate0.00%After-tax Return on invested capital (effectivel
tax rate) =0.00%Net Income4585Shareholders equity end of last
year =14.88BReturn on equity =0.00%Return Spread
computationCost of capital0.00%Return spread, with marginal
tax rate (capital)0.00%Return spread, with effective tax rate
(capital)0.00%Cost of equity0.00%Return spread
(equity)0.00%EVA computationEVA to capital$0.00EVA to
equity$0.00
6. Capital StructureGo to these spreadsheetsUse capstru.xls to
find your optimal capital structure, with no constraintsUse
capstruenhanced.xls to find your capital structure with
constraints
7. DividendsLast yearNet Income4585+Depreciation1.84B- Cap
EX-2.24- Change in non-cash WC0- (Debt repaid - New Debt
issued)-863FCFE0Dividends paid1467If you want to look at
more years, use dividends.xls
Past Riskfree ratesCurrencyAverage riskfree rate - last 2
yearsAverage riskfree rate- last 5 yearsUS
$1.00%1.50%Euro1.40%2.00%£2.00%3.00%Yen0.60%0.80%Br
azilian Reai'5.00%8.00%Indian Rupee6.00%7.00%Chinese
Yuan3.00%4.00%Swiss Franc0.80%1.00%
Currency Riskfree RatesCurrencyGovernment Bond
RateCountry Default SpreadRiskfree RateAustralian
$3.28%0.00%3.28%Brazilian Reals9.18%1.75%7.43%British
Pound1.82%0.00%1.82%Bulgarian
Leva3.43%1.75%1.68%Canadian $1.81%0.00%1.81%Chielan
Peso5.51%0.70%4.81%Chinese
RMB3.60%0.70%2.90%Colombian
Peso5.55%2.00%3.55%Croatian Kuna4.95%2.00%2.95%Danish
20. Kroner1.38%0.00%1.38%Euro1.31%0.00%1.31%Hong Kong
$0.65%0.00%0.65%Hungarian Forint6.23%2.40%3.83%Indian
Rupee8.00%2.00%6.00%Indonesian
Rupiah5.17%2.00%3.17%Israeli
Shekel3.91%0.85%3.06%Japanese
Yen0.79%0.00%0.79%Korean Won3.15%0.70%2.45%Malyasian
Ringgit3.50%1.15%2.35%Mexican Peso5.29%1.50%3.79%New
Zealand $3.54%0.00%3.54%Nigerian
Naira12.01%3.25%8.76%Norwegian
Kroner2.12%0.00%2.12%Peruvian
Sul6.76%1.75%5.01%Russian
Rubles6.85%1.50%5.35%Singapore $1.30%0.00%1.30%South
African Rand6.39%1.50%4.89%Swiss
Franc0.46%0.00%0.46%Taiwan $1.17%0.70%0.47%Thai
Baht3.54%1.50%2.04%US $1.76%0.00%1.76%Venezuelan
Bolivar10.05%4.00%6.05%Vietnamese Dong9.84%5.00%4.84%
Industry averagesIndustry NameNumber of firmsAnnual
Average Revenue growth - Last 5 yearsPre-tax Operating
MarginAfter-tax ROCAverage effective tax rateUnlevered
BetaEquity (Levered) BetaCost of equityStd deviation in stock
pricesPre-tax cost of debtMarket Debt/CapitalCost of
capitalSales/CapitalEV/SalesEV/EBITDAEV/EBITPrice/BookTr
ailing
PEAdvertising328.67%11.77%11.49%16.02%1.441.6811.51%97
.40%4.76%29.00%9.00%1.401.227.7710.402.0431.25Aerospace/
Defense6612.56%10.24%19.40%20.08%0.920.987.45%44.98%2
.76%21.03%6.23%2.710.947.429.153.1115.79Air
Transport3613.21%8.38%17.97%21.35%0.821.037.73%64.94%3
.26%37.14%5.59%2.740.786.009.323.6814.60Apparel547.69%1
0.37%13.86%18.57%1.291.369.68%74.88%3.76%12.11%8.78%
1.891.5211.7314.683.3821.64Auto
Parts5420.10%6.72%17.65%18.77%1.661.7611.94%57.43%3.26
%19.59%9.98%3.400.606.408.922.2715.39Automotive1242.35%
5.80%5.77%16.24%1.111.7311.79%59.23%3.26%50.84%6.79%
1.410.817.4613.951.2615.84Bank4160.00%NANA16.39%0.450.
776.24%50.34%3.26%56.18%3.83%NANA4.874.870.9816.58Ba
28. Lanka4.00%11.80%28.00%Sudan2.72%9.88%35.00%Sweden0.0
0%5.80%26.30%Switzerland0.00%5.80%21.17%Taiwan0.70%6.
85%17.00%Tanzania2.72%9.88%30.00%Thailand1.50%8.05%23
.00%Togo2.72%9.88%29.02%Trinidad &
Tobago1.50%8.05%25.00%Tunisia2.00%8.80%30.00%Turkey2.
40%9.40%20.00%Turks & Caicos
Islands2.99%10.29%28.30%Uganda2.72%9.88%30.00%Ukraine
6.00%14.80%21.00%United Arab
Emirates1.39%7.89%55.00%United
Kingdom0.00%5.80%24.00%United
States0.00%5.80%40.00%Venezuela4.00%11.80%34.00%Vietna
m5.00%13.30%25.00%Zambia3.67%11.30%35.00%Zimbabwe2.
72%9.88%25.75%Row LabelsDefault Spread (Weighted
average)Total ERP (Weighted
Average)Africa2.86%10.09%Australia & New
Zealand0.00%5.80%Caribbean4.52%12.57%Central and South
America2.26%9.18%Eastern Europe &
Russia1.79%8.48%Middle East0.77%6.96%North
America0.00%5.80%Western Europe0.70%6.85%Asia without
Japan1.18%7.58%Japan0.70%6.85%
answersYesNo
DescriptionsFinancial Ratios and MeasuresCorporate finance
and valuation are filled with ratios and measures that are often
not only obscure to outsiders but defined in many different (and
contradictory) ways by practitioners and academics. The table
below is my attempt to provide some underlying rationale for
wh the measure is used in the first place, the best way to define
each measure and some comments on their use or
misuse.VariablesDefinitionWhat it tries to
measureCommentsAbnormal ReturnSee Excess ReturnsAccounts
Payable /SalesAccounts Payable/ Sales (See also days
payable)Use of supplier credit to reduce working capital needs
(and to increase cash flows).There is a hidden cost. By using
supplier credit, you may deny yourself the discounts that can be
gained from early payments.Accounts Receivable/SalesAccounts
Receivable/ SalesEase with which you grant credit to customers
29. buying your products and services.A focus on increasing
revenues can lead companies to be too generous in giving
credit. While this may make the revenue and earnings numbers
look good, it is not good for cash flows. In fact, one sign that a
company is playing this short term gain is a surge in accounts
receivable.AlphaDifference between the actual returns earned
on a traded investment (stock, bond, real asset) and the return
you would have expected to make on that investment, given its
risk.Measures whether you are beating the market, after
adjusting for risk. In practice, though, it can be affected by
what risk and return model you use to compute the expected
return.When portfolio managers talk about seeking alpha, they
are talking about beating the market. However, what may look
like beating the market may just turn out to be a flaw in the risk
and return model that you used. (With the CAPM, for instance,
small cap and low PE stocks consistently have delivered
positive alphas, perhaps reflecting the fact that the model
understates the expected returns for these groups) or sheer luck
(In any given year, roughly half of all active investors should
beat the market).Alpha = Actual Return - Expected return given
riskIn the specific case of a regression of stock returns against
market returns for computing the CAPM beta, it is measured as
follows: (Jensen’s) Alpha = Intercept - Riskfree Rate (1 -
Beta)If the regression is run using excess returns on both the
stock and the market, the intercept from the regression is the
Jensen's alpha.AmortizationSee Depreciation &
AmortizationAnnual ReturnsReturns from both price
appreciation and dividends or cash flow generated by an
investment during a year. For stocks, it is usually defined as: A
percentage return during the course of a period that can be then
compared to what you would have made on other
investments.The annual return is always defined in terms of
what you iinvested at the start of the period, though there are
those who use the average price during the year. The latter
makes sense only if you make the investments evenly over the
course of the year. It cannot be less than -100% for most assets
30. (you cannot lose more than what you invested) but can be more
than -100% if you have unlimited liability. It is unbounded on
the plus side, making the distribution of returns decidedly one-
sided (or asymmetric). Returns can therefore never be normally
distributed, though taking the natural log of returns (the natural
log of zero is minus infinity) may give you a shot.(Price at end
of year - Price at start + Dividends during year) / Price at start
of yearAsset BetaSee unlevered beta (corrected for cash)Beta
(Asset)See unlevered beta (corrected for cash)Beta (CAPM)It is
usually measured using a regression of stock returns against
returns on a market index; the slope of the line is the beta. The
number can change depending on the time period examined, the
market index used and whether you break the returns down into
daily, weekly or monthly intervals.Risk in an investment that
cannot be diversified away in a portfolio (Also called market
risk or systematic risk).Regression betas have two big
problems:(a) Measured right, they give you a fairly imprecise
estimate of the true beta of a company; the standard error in the
estimate is very large. (b) They are backward looking. You get
the beta for a company for the last 2 or last 5 years. If your
company has changed its business mix or debt ratio over this
time period, the regression beta will not be a good measure of
the predicted beta.For a way around this problem, you can try
estimating bottom-up betas. (See bottom-up beta)Beta
(Market)See Beta (CAPM)Beta (Regression)See Beta
(CAPM)Beta (Total)See Total BetaBook Debt RatioSee Debt
Ratio (Book Value)Book Value of CapitalBook Value of Debt +
Book Value of EquityA measure of the total capital that has
been invested in the existing assets of the firm. It is what allows
the firm to generate the income that it does.This is one of the
few places in finance where we use book value, not so much
because we trust accountants but because we want to measure
what the firm has invested in its existing projects. (Market
value includes growth potential and is thus inappropriate) (See
book value of invested capital)There is a cost we incur. Every
accounting action and decision (from depreciation methods to
31. restructuring and one-time charges) as well as market actions
(such as stock buybacks) can have significant implications for
the book value. Large restructuring charges and stock buybacks
can reduce book capital significantly.Finally, acquisitions pose
a challenge because the premium paid on the acquisition
(classified as goodwill) may be for the growth opportunities for
the target firm (on which you have no chance of earning money
now). That is why many analysts net goodwill out of book
capital.Book Value of EquityShareholder's equity on balance
sheet; includes original paid-in capital and accumulated retained
earnings since inception. Does not include preferred stock.A
measure of the equity invested in the existing assets of the firm.
It is what allows the firm to generate the equity earnings that it
does.The book value of equity, like the book value of capital, is
heavily influenced by accounting choices and stock buybacks or
dividends. When companies pay large special dividends or buy
back stock, the book equity will decrease. In some cases, years
of repeated losses can make the book value of equity
negative.Book Value of Invested CapitalBook Value of Debt +
Book Value of Equity - Cash & Marketable SecuritiesInvested
capital mesures the capital invested in the operatinig assets of
the firm.Netting out cash allows us to be consistent when we
use the book value of capital in the denominator to estimate the
return on capital. The numerator for this calculation is after-tax
operating income and the denominator should therefore be only
the book value of operating assets (invested capital).(See book
value of capital)Bottom-Up BetaWeighted average Beta of the
business or businesses a firm is in, adjusted for its debt to
equity ratio. The betas for individual businessess are usually
estimated by averaging the betas of firms in each of these
businesses and correcting for the debt to equity ratio of these
firms.The beta for the company, looking forward, based upon its
business mix and financial leverage.There are two keys to
estimating bottom-up betas. The first is defining the business or
businesses a firm is in broadly enough to be able to get at least
10 and preferably more firms that operate in that business. The
32. second is obtaining regression betas for each of these
firms.Bottom up betas are generally better than using one
regression beta because (a) they have less standard error; the
average of 20 regressions betas will be more precise than any
one regression beta and (b) they can reflect the current or even
expected future business mix of a firm.Cap Ex/
DepreciationEstimated by dividing the capital expenditures by
depreciation. For the sector, we estimate the ratio by dividing
the cumulated capital expenditures for the sector by the
cumulated depreciation and amortization.Capital (Book
Value)This is the book value of debt plus the book value of
common equity, as reported on the balance sheet.Capital
ExpendituresCapital Spending + Investments in R&D,
exploration or human capital development +
AcquisitionsInvestment intended to create benefits over many
years; a factory built by a manufacturing firm, for instance.The
accounting measure of cap ex (usually found in the statement of
cash flows under investing activities) is far too narrow to
measure investment in long term assets. To get a more sensible
measure, we therefore convert expenses like R&D and
exploration costs (treated as operating expenses by most firms)
into capital expenditures. (See R&D (capitalized) for more
details) and acquisitions, including those funded with stock.
After all, if we want to count the growth from the latter, we
have to count the cost of generating that growth.CashCash and
Marketable Securities reported in the balance sheet.Cash and
close-to-cash investments held by a firm for a variety of
motives: precautionary (as a cushion against bad events),
speculative (to use on new investments) and operational (to
meet the operating needs of the company).At most firms, cash
and marketable securities are invested in short term, close to
riskless investments. As a consequence, they earn fairly low
returns. However, since that is what you would require them to
earn cash usually is a neutral investment; it does not hurt or
help anyone. Investors, though, may sometimes discount cash in
the hands of some managers, since they fear that it will be
33. wasted on a bad investment.Correlation with the marketThis is
the correlation of stock returns with the market index, using the
same time period as the beta estimation (see beta) . Bounded
between -1 and +1.Measures how closely a stock moves with the
market.The beta for a stock can actually be written as:Beta =
Correlation of stock with market * Standard deviation of stock/
Standard deviation of the marketAs a consequence, holding all
else constant, the beta for a stock will rise as its correlation
with the market rises. If we do not hold the standard deviation
of the stock fixed, though, it is entirely possible (and fairly
common) for a stock to have a low correlation and a high beta
(if a stock has a very high standard deviation) or a high
correlation and a low beta (if the stock has a low standard
deviation.Cost of CapitalThe weighted average of the cost of
equity and after-tax cost of debt, weighted by the market values
of equity and debt:Measures the current long-term cost of
funding the firm.The cost of capital is a market-driven number.
That is why we use market value weights (that is what you
would pay to buy equity and debt in the firm today and the
current costs of debt and equity are based upon the riskfree rate
today and the expected risk premiums today. Cost of Capital =
Cost of Equity (E/(D+E)) + After-tax Cost of Debt
(D/(D+E))When doing valuation or corporate finance, you
should leave open the possibility that the inputs into cost of
capital (costs of debt and equity, weights) can change over time,
leading your cost of capital to change. If you have hybrids (such
as convertible bonds), you should try to break them down into
debt and equity components and put them into their respective
piles. For what to do with preferred stock, see Preferred
stock.Cost of Debt (After-tax)After-tax cost of debt = Pre-tax
Cost of debt (1 —marginal tax rate)Interest is tax deductible
and it saves you taxes on your last dollars of income. Hence, we
compute the tax benefit using the marginal tax rate.The
marginal tax rate will almost never be in the financial
statements of a firm. Instead, look at the tax code at what firms
have to pay as a tax rate. (See pre-tax cot of debt and marginal
34. tax rate)Note, though, that the tax benefits of debt are available
only to money making companies. If a money losing company is
computing its after-tax cost of debt, the marginal tax rate for
the next year and the near-term can be zero.Cost of Debt (Pre-
tax)This is estimated by adding a default spread to the riskfree
rate. The rate at which the firm can borrow long term today.
The key words are long term - we implicitly assume that the
rolled over cost of short term debt converges on the long term
rate- and today - we really don't care about what rate the firm
borrowed at in the past (a book interest rate).A company's pre-
tax cost of debt can and will change over time as riskfree rates,
default spreads and even the tax rate change over time. We are
trying to estimate one consolidated cost of debt for all of the
debt in the firm. If a firm has senior and subordinated debt
outstanding, the former will have a lower interest rate and
default risk than the former, but you would like to estimate one
cost of debt for all of the debt outstanding. Pre-tax cost of debt
= Riskfreee rate + Default spreadThe default spread can be
estimated by (a) finding a bond issued by the firm and looking
up its current market interest rate or yield to maturity (b)
finding a bond rating for the firm and using that rating to
estimate a default spread or (c) estimating a bond rating for the
firm and using that rating to come up with a default spread.Cost
of EquityIn the CAPM: Cost of Equity = Riskfree Rate + Beta
(Equity Risk Premium)The rate of return that stockholders in
your company expect to make when they buy your stock. It is
implicit with equities and is captured in the stock
price.Different investors probably have different expected
returns, siince they see different amounts of risk in the same
investment. It is to get around this problem that we assume that
the marginal investor in a company is well diversified and that
the only risk that gets priced into the cost of equity is risk that
cannot be diversified away. In a multi-factor model: Cost of
Equity = Riskfree Rate + Beta for factor j * Risk premium for
factor j (across all j)The cost of equity can be viewed as an
opportunity cost. This is the return you would expect to make
35. on other investments with similar risk as the one that you are
investing in.Cost of preferred stockPreferred dividend yield =
Preferred (annual) dividends per share/ Preferred stock priceThe
rate of return that preferred stockholders demand for investing
in a companyThe cost of preferred stock should lie somewhere
between the cost of equity (which is riskier) and the pre-tax cost
of debt (which is safer). Preferred dividends are generally not
tax deductible; hence, not tax adjustment is needed. In Latin
America, preferred stock usually refers to common stock with
no voting rights but preferences when it comes to dividends.
Those shares should be treated as common equity.D/(D+E)See
Debt RatioD/E RatioSee Debt/Equity RatioDebtInterest bearing
debt + Off-balance sheet debtBorrowed money used to fund
operationsFor an item to be categorized as debt, it needs to meet
three criteria: (a) it should give rise to a fixed commitment to
be met in both good and bad times, (b) this commitment is
usually tax deductible and (c) failure to meet the commitment
should lead to loss of control over the firm. With these criteria,
we would include all interest bearing liabilities (short term and
long term) as debt but not non-interest bearing liabilities such
as accounts payable and supplier credit. We should consider the
present values of lease commitments as debt.Debt (Market
value)Estimated market value of book debtMarket's estimate of
the value of debt used to fund the businessAt most companies,
debt is either never traded (it is bank debt) or a significant
portion of the debt is not traded. Analysts consequently assume
that book debt = market debt. You can convert book debt into
market debt fairly easily by treating it like a bond: the interest
payments are like coupons, the book value is the face value of
the bond and the weighted maturity of the debt is the maturity
of the bond. Discounting back at the pre-tax cost of debt will
yield an approximate market value for debt.Debt Ratio (Book
Value)Book value of debt/ (Book value of debt + Book value of
equity)This is the accountant's estimate of the proportion of the
book capital in a firm that comes from debt.It is a poor measure
of the true financial leverage in a firm, since book value of
36. equity can not only differ significantly from the market value of
equity, but can also be negative. It is, however, often the more
common used measure and target for financial leverage at firms
that want to maintain a particular debt ratio.Debt Ratio (Market
Value)Market value of debt/ (Market value of debt + Market
value of equity)This is the proportion of the total market capital
of the firm that comes from debt.The market value debt ratio,
with debt defined to include both interest bearing debt and
leases, will never be less than 0% or higher than 100%. Since a
signfiicant portion or all debt at most firms is non-traded,
analysts often use book value of debt as a proxy for market
value. While this is a resonable approximation for most firms, it
will break down for firms whose default risk has changed
significantly since the debt issue. For these firms, it makes
sense to convert the book debt into market debt by treating the
aggregate debt like a coupon bond, with the interest payments
as coupons and discounting back to today using the pre-tax cost
of debt as the discount rate.Debt/Equity RatioDebt/ EquityThis
measures the number of dollars of debt used for every dollar of
equity.The debt to equity ratio and the debt to captial ratio are
linked. In fact, Debt/Equity = (D/(D+E))/ (1- D/(D+E))Thus, if
the debt to capital is 40%, the debt to equity is 66.667%
(.4/.6)In practical terms, the debt to capital ratio is used in
computing the cost of capital and the debt to equity to lever
betas.Default spreadDefault spread: Difference between the pre-
tax cost of debt for a firm and the riskfree rateMeasures the
additional premium demanded by lenders to compensate for risk
that a firm will default.The default spread should always be
greater than zero. If the riskfree rate is correctly defined, no
firm, no matter how safe, should be able to borrow at below this
rate. The default spread can be computed in one of three ways:a.
Finding a traded bond issued by a company and looking up the
yield to maturity or interest rate on that bond.b. Finding a bond
rating for a firm and using it to estimate the default spreadc.
Estimating a bond rating for a firm and using it to estimate the
default spreadDeferred Tax (Asset)Deferred Tax asset (on
37. balance sheet)Measures the credit that the firm expects to get in
future periods for overpaying taxes in current and past periods.
The credit will take the form of lower taxes in future periods
(and a lower effective tax rate)For this asset to have value, the
firm has to anticipate being a going concern, profitable and
being able to claim the overpayments as tax deduction in future
time periods. In other words, there would be no value to this
asset if the firm were liquidated today.Deferred Tax
(Liability)Deferred tax laibility (on balance sheet)Measures the
liability that the firm sees in the future as a consequences of
underpaying taxes in the current or past perios. The liability
will take the form of higher taxes in future periods (and a
higher effective tax rate)It is not clear that this is a liability in
the conventional sense. If you liquidated the firm today, you
would not have to meet this liablity. Consequently, it should not
be treated like debt when computing cost of capital or even
when going from firm value to equity value. The most effective
way of showing it in a valuaton is to build it into expected tax
payments in the future (which will result in lower cash
flows)Depreciation and AmortizationAccounting write-off of
capital investments from previous years.Reflects the depletion
in valuation of existing assets - depreciation for tangible and
amortization for intangible.Accounting depreciation and
amortization usually is not a good reflection of economic
depletion, since the depreciation choices are driven by tax rules
and considerations. Consequently, you may be writing off too
much of some assets and too little of others. While depreciation
is an accounting expense, it is not a cash expense. However, it
can affect taxes because it is tax deductible. The tax benefit
from depreciation in any given year can be written as:Tax
benefit from depreciation = Depreciation * Marginal tax
rate Amortization shares the same effect, if it is tax deductible
but it often is not. For instance, amortization of goodwill
generally does not create a tax benefit.One final point. Most US
firms maintain different sets of books for tax and reporting
purposes. What you see as depreciation in an annual report will
38. deviate from the tax depreciation.Dividend PayoutDividends/
Net Income Measures the proportion of earnings paid out and
inversely, the amount retained in the firm.The dividend payout
ratio is widely followed proxy for a firm's growth prospects and
place in the life cycle. High growth firms, early in their life
cycles, generally have very low or zero payout ratios. As they
mature, they tend to return more of the cash back to investors
causing payout ratios to increase. In many markets, as
companies have chosen to switch to stock buybacks as an
alternative to dividends, this ratio has become less meaningful.
One way to adapt it to switch to an augmented payout
ratio:Usually cannot be compute for money losing companies
and can be greater than 100%.Augmented Payout Ratio =
(Dividends + Buybacks)/ Net IncomeDividend YieldDividends
per share/ Stock PriceMeasures the portion of your expected
return on a stock that will come from dividends; the balance has
to be expected price appreciation.The dividend yield is the cash
yield that you get from investiing in stocks. Generally, it will
be lower than what you can make investing in bonds issued by
the same company because you will augment it with price
appreciation. There are some stocks that have dividend yields
that are higher than the riskfree rate. While they may seem like
a bargain, the dividends are not guaranteed and may not be
sustainable. Studies of stock returns over time seem to indicate
that investing in stocks with high dividend yields is a strategy
that generates positive excess or abnormal returns. Finally, the
oldest cost of equity model is based upon adding dividend yield
to expected growth:Cost of equity = Dividend yield + Expected
growth rateThis is true only if you assume that the firm is in
stable growth, growing at a cosntant rate
forever.DividendsDividends paid by firm to stockholdersCash
returned to stockholdersDividends are discretionary and firms
do not always pay out what they can afford to in dividends. This
is attested to by the large and growing cash balances at firms.
Models that focus on dividends often miss two key components:
(a) Many companies have shifted to return cash to stockholders
39. with stock buybacks, instead of dividends and (b) The potential
dividends can be very different from actual dividends. For a
measure of potential dividends, see Free Cashflow to
Equity.Earnings YieldEarnings per share/ Stock priceThis is the
inverse of the PE ratio and mesures roughly what the firm
generates as earnings for every dollar invsted in equity. It is
usually compared to the riskfree or corporate bond rate to get a
measure of how attractive or unattractive equity investments
are.Analysts read a lot more into earnings yields than they
should. There are some who use it as a measure of the cost of
equity; this is true only for mature companies with no growth
opportunities with potential excess returns.One nice feature of
earnings yields is that they can be computed and used even if
earnings are negative. In contrast, PE ratios become
meaningless when earnings are negative.EBITDAEarnings
before interest expenses(or income), taxes, depreciation and
amortizationMeasures pre-tax cash flow from operations before
the firm makes any investment back to either maintain existing
assets or for growthEBITDA is used as a crude measure of the
cash flows from the operating assets of the firm. In fact, there
are some who argue that it is the cash available to service
interest and other debt payments. That view is misguided. Firms
that have large depreciaton charges often have large capital
expenditure needs and they still have to pay taxes. In fact, it is
entirely possible for a firm to have billions in EBITDA and no
cash available to service debt payments (See Free Cash Flow to
the Firm for a more complete measure of operating cash
flow)Economic Profit, Economic Value Added or EVA(Return
on Invested Capital - Cost of Capital) (Book Value of Invested
Capital)Measures the dollar excess return generated on capital
invested in a companyTo the degree that the book value of
invested capital measures actual capital invested in the
operating assets of the firm and the after-tax operating is a
clean mesure of the true operating income, this captures the
quality of a firm's existing investments. As with other single
measures, though, it can be easily gamed by finding ways to
40. write down capital (one-time charges), not show capital
invested (by leasing rather than buying) or overstating current
operating income.(See Excess Returns)Effective tax rateTaxes
payable/ Taxable incomeMeasures the average tax rate paid
across all of the income generated by a firm. It thus reflects
both bracket creep (where income at lower brackets get taxed at
a lower rate) and tax deferral strategies that move income into
future periods.Attesting to the effectiveness of tax lawyers,
most companies report effective tax rates that are lower than
their marginal tax rates. The difference is usually the source of
the deferred tax liability that you see reported in financial
statements. While the effective tax rate is not particularly useful
for computing the after-tax cost of debt or levered betas, it can
still be useful when computing after-tax operating income (used
in the Free Cashflow to the Firm and return on invested capital
computations) at least in the near term. It does increasingly
dangerous to assume that you can continue to pay less than your
marginal tax rate for longer and longer periods, since this
essentially allows for long-term or even permanent tax
deferral.Enterprise ValueMarket value of equity + Market value
of debt - Cash + Minority InterestsMeasures the market's
estimate of the value of operating assets. We net out cash
because it is a non-operating assets and add back minority
interests since the debt and cash values come from fully
consolidated financial statements. (See Minority Interests for
more details)In practice, analysts often use book value of debt
because market value of debt may be unavailable and the
minority interest item on the balance sheet. The former practice
can be troublesome for distressed companies where the market
value of debt should be lower than book value and the latter
practice is flawed because it measures the book value of the
minority interests when what you really want is a market value
for these interests.This computation can also sometimes yield
negative values for companies with very large cash balances.
While this represents a bit of puzzle (how can a firm trade for
less than the cash on its balance sheet?), it can be explained by
41. the fact that it may be impossible to take over the firm and
liquidiate it or by the reality that the cash balance you see on
the last financial statment might not be the cash balance
today.Enterprise Value/ Invested Capital(Market value of equity
+ Debt - Cash + Minority Interests)/ (Book value of equity +
Debt - Cash + Minority Interests) Market's assessment of the
value of operating assets as a percentage of the accountant's
estimate of the capital invested in these assetsBy netting cash
out of the both the numerator and the denominator, we are
trying to focus attention on just the operating assets of the firm.
This ratio, which has an equity analog in the price to book ratio,
is determined most critically by the return on invested capital
earned by the firm; high return on invested capital will lead to
high EV/Capital ratios.(See descriptions of Enterprise value and
Invested Capital )Enterprise Value/ EBITDA(Market value of
equity + Debt - Cash + Minority Interests)/ EBITDAMultiple of
pre-tax, pre-reinvestment operating cash flow that the firm
trades atCommonly used in sectors with big infrastructure
investments where operating income can be depressed by
depreciation charges. Allows for comparison of firms that are
reporting operating losses and diverge widely on depreciation
methods used. It is also a multiple used by acquirers who want
to use significant debt to fund the acquisition; the assumption is
that the EBITDA can be used to service debt payments.(See
descriptions of Enterprise Value and EBITDA)Cash is netted
out from the firm value because the income from cash is not
part of EBITDA. However, the same can be said of minority
holdings in other companies - the income from these holdings is
not part of EBITDA - and the estimated value of these holdings
should be netted out as well. With majority holdings, the
consolidation that follows creates a different problem: the
market value of equity includes only the portion of the
subsidiary owned by the parent but all of the other numbers in
the computation reflect all of the subsidiary. This should
explaiin why minority interests are added back to the
numerator.Enterprise Value/ Sales(Market value of equity +
42. Debt - Cash + Minority Interests)/ RevenuesMarket's assessment
of the value of operating assets as a percentage of the revenues
of the firm.While the price to sales ratio is a more widely used
multiple, the enterprise value to sales ratio is more consistent
because it uses the market value of operating assets (which
generate the revenues) in the numerator.Equity EVA(Return on
Equity - Cost of Equity) (Book Value of Equity)Measures the
dollar excess return generated on equity invested in a
companyTo the degree that the inputs into the equation are
reasonable estimates, this becomes a measure of the success a
company has shown with its existing equity investments.
However, both the return on equity and book value of equity are
accounting numbers, and can be skewed by decisions (such as
stock buybacks and restructuring charges). At the limit, it
becomes meaningless when the book value of equity becomes
negative.(See Excess Returns (on Equity))Equity Reinvestment
Rate((Capital Expenditures - Depreciation) - Change in non-
cash Working Capital - (Principal repaid - New Debt Issued))/
Net IncomeMeasures the proportion of net income that is
reinvested back into the operating assets of the firmThe
conventional measure of equity reinvestmnt is the retention
ratio, which looks at the proportion of earnings that do not get
paid out as dividends. The equity reinvestment is both more
focused and more general. It is more focused because it looks at
the portion of the earnings held back that get invested into the
operating assets of the firm and more general because it can be
a negative value (for firms that are letting their assets run
down) or greater than 100% (for firms that are issuing fresh
equity and investing it back into the business).Equity Risk
Premium (ERP)Expected Returns on Equity Market Index -
Riskfreee RatePremium over the riskfree rate demanded by
investors for investing the average risk stockThe ERP is a key
component of the cost of equity for all companies, since it is
multiplied by the beta to get to the cost of equiity. If you over
estimate the ERP, you are going to under value all
companies.Equity Risk Premium - HistoricalAverage Annual
43. Return on Stocks - Average Annual Return on Riskfree
investmentActual premium earned by investors on stocks,
relative to riskfree investment, over the time periodThe
historical risk premium is usually estimated by looking at long
time period. For instance, in the United States, it is usually
estimated over eight decades (going back to 1926). There are
two dangers in using this historical risk premium. The first is
that the long time period notwithstanding, the historical risk
premium is an estimate with a significant standard error (about
2% for 80 years of day). The second is that the market itself has
probably changed over the last 80 years, making the historical
risk premium not a good indicator for the future.Equity Risk
Premium - ImpliedGrowth rate implied in today's stock prices,
given expected cash flows and a riskfree rate. (Think of it as a
internal rate of return for equities collectively).Reflects the risk
that investors see in equities rght now. If investors think
equities are riskier, they will pay less for stocks today.The
implied equity risk premium moves inversely with stock prices.
When stock prices go up, the implied equity risk premium will
be low. When stock prices go down, the implied premium will
be high. Notwithstanding the fact that you have to use an
expected growth rate for earnings and a valuation model, the
implied equity risk premium is both a forward looking number
(relative to historical premiums) and constantly updated.Excess
ReturnsReturn on Invested Capital - Cost of capitalMeasure the
returns earned over and above what a firm needed to make on an
investment, given its risk and funding choices (debt or
equity).Excess returns are the source of value added at a firm;
positive net present value investments and value creating
growth come from excess returns. However, excess returns
themselves are reflections of the barriers to entry or competitive
advantages of a firm. In a world with perfect competition, no
firm should be able to generate excess returns for more than an
instant.Excess Returns (on equity)Return on Equity - Cost of
EquityMeasures the return earned over and above the required
return on an equity investment, given its risk. It can be at the
44. level of the firm making real investments and at the level of the
investor picking individual stocks for her portfolio.To generate
excess returns. you have to bring something special to the table.
For firms, this may come from a brand name, economies of
scale or a patent. For investors, it is more difficult but it can be
traced to better information, better analysis or more discipline
than other investors.Firm ValueMarket Value of Equity +
Market Value of DebtMeasures the market value of all assets of
a firm, operating as well as non-operating.Since the value of the
firm includes both operating and non-operating assts, it will be
greater than enterprise value. To the extent that we are looking
at how value relates to operating items (operating income or
EBITDA), you should not use firm value but should use
enterprise value instead; the income from cash is not part of
operating income or EBITDA.Fixed Assets/Total AssetsFixed
Assets/ Total AssetsMeasures how much of a firm's investments
are in tangible assets.This ratio should be higher for
manufacturing firms than for service firms and reflects the bias
in accounting towards tangible assets. Many lenders seem to
share this bias and are willing to lend more to firms with
significant fixed assets.The ratio can also be affected by the age
of the assets, since older assets, even if productive, will be
written down to lower values.Free Cash Flow to Equity
(FCFE)FCFE = Net Income - (Capital Expenditures -
Depreciation) - Change in non-cash Working Capital -
(Principal repaid - New Debt Issued)Measures cash flow left
over for equity investors after taxes, reinvestment needs and
debt needs are met. For a growing firm, debt cash flows can be
a source of positive cash flows; new debt brings cash to equity
investors.This is a post-debt cash flow. When it is positive, it
measures what can be paid out by the firm without doing any
damage to its operations or growth opportunities. In other
words, it is the potential dividend and can be either paid out as
such or used to buy back stock. When it is negative, it indicates
that the firm will have raise fresh equity. When we discount
FCFE in a valuation model, we are implicitly assuming that no
45. cash builds up in the firm and the present value will already
incorporate the effect of future stock issues. (Discounting
negative FCFE in the early years will push down the value per
share today; think of that as the dilution effect)Free Cash Flow
to Firm (FCFF)FCFF = EBIT(1-t) - (Capital Expenditures -
Depreciation) - Change in non-cash Working CapitalMeasures
cash flow left over for all claimholders in the firm (lenders and
equity investors) after taxes and reinvestment needs have been
met.This is a pre-debt cash flow. That is why we start with
operating income, rather than net income (which is after interest
expenses) and act like we pay takes on operating income. In
effect, we are acting like we have no interest expenses or tax
benefits from these interest expenses when computing cash
flows. That is because these cash flows are discounted back at a
cost of capitatl that already reflects the tax benefits of
borrowing (through the after-tax cost of debt). A positive free
cash flow to the firm is cash available to be used to make
payments to debt (interest expenses and prinicipal payments)
and to equity (dividends and stock buybacks).A negative free
cash flow to the firm implies that the firm faces a cash deficit
that has to be covered by either issuing new stock or new debt
(the debt ratio used in the cost of capital determines the
mix).Fundamental growth in EPSRetention Ratio * Return on
Equity Expected growth in earnings per share if the firm
maintains this return on equity on new investment and invests
what it does not pay out as dividends in these new
investments.Since the retention ratio cannot exceed 100%, this
caps the growth in earnings per share at the return on equity, if
the return on equity is stable. However, this formula will yield
an incomplete measure of growth when the return on equity is
changing on existing assets. In that case, there will be an
additional component to growth that we can label efficiency
growth. Thus, doubling the return on equity on existing assets
from 5% to 10% will generate a growth rate of 100% even if the
retentiion ratio is zero.(See definitions of both
items)Fundamental growth in net incomeEquity Reinvestment
46. Rate * Non-cash Return on Equity Measures the growth rate in
net income from operating assets, if the equity reinvestment rate
and return on equity remain unchanged.Since the equity
reinvestment rate can be greater than 100% or less than 0%, this
measures implies that the growth in net income can exceed
growth in earnings per share (for firms that issue new stock to
reinvest) or be negative (for firms with negative equity
reinvestment rates). As with the other fundamental growth
measures, this one measures growth only from new investments;
there can be an additional component that can be traced to
improving or dropping return on equity on existing
investments.(See definitions of both items)Fundamental growth
in operating incomeReinvestment Rate * Return on
CapitalMeasures the growth rate in after-tax operating income,
if the reinvestment rate and return on capital remain
unchanged.The growth in operating income is a function of both
how much a firm reinvests back (reinvestment rate) and how
well it reinvests its money (the return on capital). As a general
rule, growth created by reinvesting more at a return on capital
that is more (less) than the cost of capital will create (destroy)
value. A firm's growth rate in the short term can be higher or
lower than this number, to the extent that the return on capital
on existing assets increases or decreases.GoodwillPrice paid for
equity in an acquisition - Book value of equity in acquired
companyMeasures the intangible assets of the target companyIn
reality, goodwill is not an asset but a plug variable used to
balance the balance sheet after an acquisiton. It is composed of
three parts - the value of the growth assets of the target firm
(which would not have been reflected in the book value), the
value of synergy and control and any overpayment made by the
firm. How we deal with goodwill will vary depending on its
source. If it is for growth assets, it creates inconsistencies in
balance sheets since we do not allow firms to record growth
assets that may be generated internally. If it is for synergy and
control, it should be reflected as additional value in the
consolidated balance sheet, but that value has to be reassessed,
47. given the actual numbers. If it is an overpayment, it is money
wasted. When we do return on invested capital, for instance, we
clearly want to subtract out the first from invested capital but
we should leave the last two elements in the number.Gross
MarginGross Profit/ Sales(See Gross Profit)Gross
ProfitRevenues - Cost of Goods SoldMeasures the profits
generated by a firm after direct operating expenses but before
indirect operating expenses, taxes and financial expenses.The
line between gross and operating profit is an artifical one. For
the most part, the expenses that are subtracted out to get to
gross profit tend to be costs directly traceable to the product or
service sol and the expenses that are treated as indirect are
expenses such as selling, general and administrative costs. If we
treat the latter as fixed costs and the former as variable, there
may be some information in the gross profit.Historical Equity
Risk PremiumSee Equity Risk Premium (Historical)Historical
Growth RateGrowth rate in earnings in the past. Measures how
quickly a firm's earnings have grown in the past.Historical
growth rates can be sensitive to starting and endiing periods and
to how the average is estimated - arithmetic averages will
generally yield higher growth rates than geomteric averages.
While knowing past growth makes us feel more comfortable
about forecasting future growth, history suggests that past
growth is not a good predictor of future growth.(Earnings
(today)/Earning (n years ago))^(1/n)-1Hybrid secuityA security
that combines the features of debt and equityCapital invested
(not current market value) of issued security.Hybrid securities
are best dealt with, broken up into debt and equity components.
For convertible bonds, for instance, the conversion option is
equity and the rest is debt. Preferred stock is tougher to
categorize and may require a third element in the cost of
capital.Implied Equity Risk PremiumSee Equity Risk Premium
(Implied)Insider Holdings %Shares held by insiders/ Shares
outstandingMeasures how much of the stock is held by insiders
in a company. The SEC definition of insdiers includes those
who hold more than 5% of the shares.If we assume that insiders
48. are or are allied with the incumbent managers of the firm, this
ratio becomes an inverse measure of how much influence
outside stockholders have over this firm. The higher this ratio,
the less of a role outside investors willl have in the management
of a company...This can also have an effect in how we think
about and measure risk. If the insdier holdings are high, the
assumption we make about marginal investors being well
diversifed in risk and return models may come under
assault.Institutional Holding %Shares held by institutions/
Shares outsandingMeasures how much of the stock is held by
mutual funds, pension funds and other institutional investors.If
institutional investors hold a substantial proportion of a firm,
the assumption we make about investors being well diversifed is
well founded. Conseqently, we can safely assume that only non-
diversifiable risk has to be priced into the cost of equity and
ignore risk that can be diversified away.Interest coverage
ratioInterest coverage ratio = EBIT / Interest ExpenseMeasures
the margin for error the firm has in making its interest
expenses. If this ratio is high, the firm has much more margin
for error and is therefore safer (from the lender's
perspective)There are a number of ratios that measure a firm's
capacity to meet its debt obligatiion. The fixed charges ratio,
for instance, is the ratio of EBITDA to total fixed charges. In
estimating this ratio, you should try to get a measure of the
operating income that the firm can generate in a normal year
(this may require looking at operating income over an economic
cycle or over a period of time) relative to its interest expenses.
Other things remaining equal, the higher this ratio, the higher
the rating and the lower the default spread for a firm.Inventory/
SalesEstimated by dividing the cumulated inventory for the
sector by the cumulated sales for the sectorMeasures how much
inventory the firm needs to hold to sustain its revenues.When
this ratio is high, a firm will find that its cash flows lag its
earnings. The magnitude of this number will vary across
businesses. Generally, businesses that sell high priced products
where sales turnover ratios are low (luxury retailers, for
49. instance) will have to maintain high inventory.Invested
CapitalSee Book Value of Invested CapitalLeases
(Operating)Expense for current year is shown as part of
operating expenses; commitments for future years are shown in
footnotes.Measured the reduction in income created by having
to meet lease obligations in current period.While accountants
and tax authorities draw a distinction between operating and
capital leases, they look much the same from a financial
perspective. They are both the equivalent of borrowing, though
lease commitment can be viewed as more focused borrowing
(because it is tied to an individual asset or site) and more
flexible (a firm can abandon an individual lease without
declaring bankruptcy) than conventional debt. The best
approach is to use the pre-tax cost of debt as the discount rate
and discount future lease commitments back to today to get a
debt value for operating leases. This will also create a leased
asset, which has to be depreciated. As a result, operating
income will have to be restated:Adjusted Operating Income =
Operating Income + Current year's lease expense - Depreciation
on leased assetLeases (Capital)Commitments converted into
debt (by discounting at a pre-tax cost of debt) and shown on
balance sheet. Imputed interest expenses and depreciation
shown on income statement.Measures the debt equivalent of
lease commitments.Accountants do for capital leases what we
suggested that they need to do for operating leases. One cost of
having them do it (rather than yourself) is that you do not
control when the present value is computed (usually at the time
of the financial statement) and the pre-tax cost of debt
used.Marginal tax rateTax rate on last dollar or next dollar of
income.Measures the taxes you will have to pay on additional
income that you will generate on new investments and the
savings that you will obtain from a tax deduction.The marginal
tax rate is best located in the tax code for the country in which a
company operates. In the United States, for instance, the
marginal federal tax rate is 35%. With state and local taxes
added on, this number will increase (to 38-40%). For companies
![Daily Price RecordBoeing Co (The) [BA] 09702310
ActiveFrom 1/1/2012 to 12/31/2014As of 01/19/15 10:05
AMDateDividend IndicatorVolumeHigh PriceLow PriceClose
PriceAdjusted Close PriceQ1 Avg Adj Close
Price1/2/0865784657574.1274.2274.2274.901/3/08492286374.6
73.5974.3374.331/4/08678788873.972.7473.5373.531/5/084760
23774.2772.9573.9873.981/8/08446918374.8774.1874.5374.531
/9/08462224875.3474.575751/10/08308236074.9574.2374.7474.
741/11/08393279575.6974.7875.5175.511/12/08464091275.274.
1674.674.61/16/0836994197675.1475.2475.241/17/0841869117
5.4574.7775.0675.061/18/08539656575.9275.175.5675.561/19/0
8455206975.975.1475.5275.521/22/08408322376.3775.3275.51
75.511/23/08493428675.6274.675.3675.361/24/081404907076.7
72.8575.8275.821/25/08418730976.367575.3175.311/26/084754
50475.2374.4174.5574.551/29/08504292274.3573.6874.1674.16
1/30/08477725175.273.9674.1874.181/31/08429610175.8974.96
75.3775.372/1/08352807275.3374.575.2275.222/2/08347206276
.7475.8676.3476.342/5/08416078775.5575.1675.4675.462/6/084
43852175.3574.375.275.22/7/08X534993775.6574.5175.4675.46
2/8/08449087376.2375.3775.975.92/9/08336187375.5674.5774.
9574.952/12/08345409375.5174.7574.8574.852/13/0846519497
5.5774.975.5675.562/14/084251971767575.2175.212/15/084991
23075.4774.8775.2775.272/16/08492723275.5575.0275.3575.35
2/20/08397808675.9575.0875.7275.722/21/08376474776.375.31
76.0676.062/22/08418651276.1775.5275.8575.852/23/08334665
976.6475.6376.0676.062/26/08537028475.7875.0175.2175.212/
27/08366726075.4174.8175.1675.162/28/08463271875.7274.75
74.9574.952/29/08334274175.6374.8675.0875.083/1/082806409
75.2874.6374.974.93/4/08415667874.9873.9374.1374.133/5/085
42598773.2472.372.5672.563/6/08427894273.772.5173.5273.52
3/7/08388117674.773.8374.1774.173/8/08553486774.3173.1773
.2973.293/11/08283346874.0373.273.673.63/12/08452898974.3
573.3874.3174.313/13/08529687675.3874.3175.2375.233/14/08
485064675.6374.8875.4375.433/15/08707983275.817575.275.2](https://image.slidesharecdn.com/dailypricerecordboeingcotheba09702310activefrom1-221114172945-585f111f/85/Daily-Price-RecordBoeing-Co-The-BA-09702310-ActiveFrom-1-docx-1-320.jpg)
